Why Buzz Lightyear Is Worth Billions More Than Han Solo

If you are among the Star Wars faithful, it’s hard to put a dollar value on 35 years of lightsabers, Ewoks, and windpipe-crushing applications of The Force. Apparently, it’s worth just north of $4 billion, which is what Disney is paying for Lucasfilm, the studio that is the home to George Lucas and all his Star Wars pals. Yes, there is also Indiana Jones and his swashbuckling cohort, videogames and special effects, but in a call with investors Disney CFO Jay Rasulo made it clear that when Disney did its math it was the value of the Star Wars franchise that was the main calculation.

The same discounted cash-flow analysis was done back in 2006 when Disney, with Bob Iger also at its helm, bought Pixar for $7.4 billion. That’s 85 percent more than what it’s paying for Lucasfilm – in a galaxy far, far away they call that practically double. So why was Pixar almost seven years ago worth so much more than Lucasfilm is today?

Part of it has to do with the point at which Disney pulled the trigger on Pixar. The eventual studio actually started as part of the computer division of Lucasfilm in 1979 and stumbled along as a graphics and hardware company with Steve Jobs at the helm from 1986 until the ’90s when it got into producing its own feature films. By the time Iger whipped out his checkbook, Pixar was on an unbelievable streak. From Toy Story to A Bug’s Life, Monster’s Inc., Finding Nemo, and The Incredibles, Pixar had one massive hit after the next. Cars was waiting in the wings, and while it didn’t do Nemo numbers at the box office (its worldwide gross was $461 million versus $921 million for the fish tale), Cars crushed it in the merchandise department.

So Pixar had growth on its side, which always pushes the price higher. In 2006, Pixar also had technology on its side. The DVD was still going strong, and people were swapping their VHS versions of Toy Story 2 for the DVD format. As far as the catalog value of Pixar’s movies, it was at its peak in 2006 (same holds true for Star Wars), before iTunes came to the movie party and the cheap streaming services that would follow.

‘Pixar is a franchise-making machine. Lucasfilm is driven by only one franchise.’

But the key difference between the value of Pixar and Lucasfilm is exactly what Rasulo described: Disney is buying a single franchise. “Pixar is a franchise-making machine that has continually churned out huge, worldwide hits at the box office based on completely different content,” says Stephen Prough, founder of Los Angeles-based Salem Partners, a boutique investment bank specializing in entertainment deals. “The value of Lucasfilm is driven by only one franchise, albeit a big one.”

Remember too, that Pixar had at the time of its acquisition, and has to this day, a staff of more than 1,000 on hand to realize its creations from start to finish. When Lucasfilm was cranking out a Star Wars prequel, it called up a Hollywood studio, staffed up with studio folks and got to movie-making. When it was all over, everyone at Lucasfilm went back to his or her quiet lives in Northern California’s Marin County. Lucasfilm is a small company by comparison, with just a few hundred employees. So how did they get to $4 billion in value?

In general, Disney would have arrived at its number by breaking down the Star Wars business into three main chunks: the merchandise and games, the movies so far, and the movies yet to come. Let’s start with merchandise, which according to estimates from Barclays analyst Anthony DiClemente, accounts for about 25 percent of Lucasfilm’s business, and which is projected to bring in around $215 million in 2012. Multiply that by four and you get to $860 million.

Let’s assume much of the Lucasfilm businesses carry about 40 percent margins. With the exception of the special effects shop Industrial Light & Magic; it’s mostly a licensing business after all: People just write you checks. At $344 million in profits, all you need is a 12X multiple — not a stretch — to get to the number that Disney offered to Lucasfilm.

To triangulate the value placed on the future Star Wars films, you can look at the past cash flow of the last three movies — about $500 million during the years they were released. Disney plans to do that at least three more times, so $1.5 billion in cash flow.

Given that the future movies aren’t produced yet, the mouse-eared number crunchers would have estimated production and marketing costs along with high, medium and low scenarios at the box office, and discounted that cash flow to the present to arrive at a price for future movie rights. You get to around $1 billion-plus in value, again consistent with estimates of the percentage of revenue the movies contribute — 25 percent — to Lucasfilm.

There is probably some wiggle room by category, but in the end the value of Lucasfilm, and in particular the Star Wars franchise, was put at $4.03 billion, a price that Disney and Lucasfilm’s owner George Lucas both agreed on. That’s about what Disney paid for Marvel in 2009, and for good reason: They are very similar deals.

Barclays’ DiClemente says the Lucasfilm acquisition is straight from the Marvel playbook, and as with Marvel, Disney stands to rev up the revenue from the Star Wars collection of movies and merchandise by sending it through its finely tuned global distribution machine. “We think Disney is perhaps the best media company at monetizing its intellectual property and rolling it through the Disney ecosystem,” DiClemente says. “In addition to the box office, Star Wars intellectual property lends itself to the theme parks (where Disney already has Star Wars attractions), to cable TV, and to consumer products, which we think could be the biggest driver of value.”

And say what you want about the potential of other Marvel characters like Ant-Man and Ghost Rider, but so far, Marvel, like Lucasfilm is mostly a single franchise shop, and the Avengers are it. (Disney didn’t own Marvel during the Tobey Maguire Spiderman era. It does own the Tick about which a movie has been at times threatened.)

Yes, it’s hard for some to stomach that in the M&A battle that is Woody versus Darth Vader; Woody just put his spurs down the Sith Lord’s throat. But Pixar heads and Star Wars nuts alike can all take heart in the other shift that the sale of Lucasfilm brings, George Lucas has finally decided to let someone else direct.